A 401k plan, for the many people who have no idea what this is, is an office or workplace savings plan that allows employees invest a portion of their salaries before taxes are deducted. Taxes will therefore not be paid until the money is withdrawn from the account. A 401k retirement plan is, thus, sponsored by an employer. The plan was named after the section after the code that governs them. That is, in the United States, it is the tax-qualified, defined-contribution pension account that was defined in subsection 401k of the Internal Revenue Code. The birth of the plan was sometime around the 1980s and it came up as a supplement to pensions.

There are still a whole lot of related employer-provided defined contribution plans such as: the 457(b) plans which is for governmental employers and, of course, the 403(b) plans for non-profit institutions. As popular and effective as 401k plans are in the United States, only about half of American citizens work for companies that offer them. One great benefit and reason that makes having a 401k plan wonderful, is that whether you are on pre-tax or after-tax contributions, what you earn from all investments in a 401k account is tax-deferred. So if it is the form of dividend, interest or even capital, they are all tax-deferred. The longer you choose to hold it, the more money that you ultimately make and the better your returns are.

However, this does not carry the entirety of the 401(k) plan. There is way more to it than can be seen on the surface. In other to be sure if you want to make this contribution or not, you have to assess all angles to it and thereafter make your decision. It sounds great knowing that you can directly control how your money is invested – either in bonds or stocks – but and that you can save for even longer periods through this avenue, but the complexities and conditions surrounding every aspect of the 401k retirement plan can be dire. How do you and your employer monitor your account and your investments? How much tax would you have to pay after all is said and done? What are the risks attached to having a 401k plan? What are the underlying rewards? All of these you would understand better as you progress with this article.

401k Third-Party Administrators (TPA)

A Third-Party administrator is basically an organization that is hired by your employer or the 401k plan sponsor, to run your retirement plans for you. The 401k plan administrators, have a point of duty to make sure your retirement plans are following the set rules and perform necessary duties to sufficiently protect your investments amongst others. Their fees can paid by either the employers, the employees, or a combination of both of them, depending on the factors surrounding the agreement.

401k Third-Party Administrators are sometimes not so ‘Third-Party’. A few organizations simply use some of their own staff in related field and expect them to know exactly what to do and what decisions to make or not make. Even when the employers or employees get a third party administrator for their 401k plan, there is little communication between them which in turn causes untold discrepancies. To be safe, there has to be proper balance. First, you have to hire a properly equipped third party administrator that is willing to communicate the details of each investment plan. Next, you have to hire or have in-house brokers or financial planners that are capable of providing services and advices to the employees.

Still, nothing is better than having a good 401k plan administrator that you can liaise with directly and ask all your questions regarding loans, contribution limits and many more. Some of the best 401k administrators you can sign up with in the United States, are listed below:

  • Fidelity Investments
  • Vanguard
  • MassMutual financial group
  • ADP Retirement services
  • AXA
  • Plan Administrators, inc. (PAi)
  • Alliance Banefit Group
  • Principal Financial Group
  • Wells Fargo

Many other administrators exist, but care should be taken in choosing the right one that suits your investments needs.

Risk versus Reward of 401k

As stated earlier, a 401k plan is not as fantastic as it seems. For this reason, we would view the risks before analysing the rewards. The first risk of venturing into a 401k retirement savings plan, is that there is no government insurance for assets held in 401(k) accounts. Note that there is no governmental insurance, so there could be private insurance providers that would be willing to cover your 401k plan.

One of the challenges of not being able to really insure your 401k plans is that you could lose everything overnight. You are not really protected from loss. Your 401k investment rises and falls with the stock market. If you understand how the stock market works, then you would see the riskiness in this.

Next is the fact that your money is tied down. In essence, you may be illiquid when you need it the most. In fact, your 401k plan is tied with certain penalties for early withdrawals. At certain points, you may be allowed to borrow from it but it is not like having your money.

Another serious disadvantage or risk is the administrative fees and all the related compounding costs. It is so bad that it can swallow more than half of your gains. You have bookkeeping fees, legal fees, trustee fees and many more. Enough to make the entire process not so worth it.

One important risk that most people overlook is the issue of taxes. Sure people go into it because they feel that there are no taxes, at least for now, but that is where they get it very wrong. The taxes are deferred – meaning they are postponed. Upon withdrawal, you would be faced with higher tax brackets.

Now a few rewards. As mentioned earlier, you have long term savings. You can place your money on major lockdown and have something even bigger when you retire. You also enjoy the presence of matching contributions as many employers would match a portion of your savings.

You get to enjoy all the loans you can take from the 401k account. It is like borrowing from yourself and, thus, is safer than some other high interest-bearing loans you would take. You have a wide scope of investment options as well. You can choose where to invest your money yourself.

Tax deferred earnings is the prime reason having a 401k plan sounds cool. It makes your taxable income lower and saves you a lot of taxable expenses.

So many other advantages and disadvantages exist. One just has to decide which trade-off works best.